Infosys’ Lodestone Acquisition to drive Revenues, Normalize Margins

September 11, 2012

Infosys is acquiring acquire Lodestone for an EV of US$350mn in cash, payable in two tranches – USD 250Mn upfront and the rest after 3 years, subject to certain conditions. Lodestone is a Swiss SAP consulting firm with US$ 217mn revenues in 2011 with 83% coming from Europe (50% in Switzerland, 23% in Germany).

Lodestone advises clients on strategy and process optimization and provides business transformation solutions enabled by SAP. Lodestone has more than 200 clients across industries with a vertical mix of 28% revenues from life sciences, 17% from industrial manufacturing, 16% from auto, 14% from consumer goods.

Its a good move by the management’s commitment to evaluation of inorganic opportunities in its Infosys 3.0 pursuit, given time-to-market benefits. While there could be some debate around valuations, there are synergies in consulting / Europe / clientele / life sciences – we are positive on this acquisition. As with every acquisition, execution is the key.

The Lodestone acquisition is positive for Infosys and could help ailing revenue growth for the company in 2HFY13. We believe Infosys’s core underlying margins may be 200-300bps higher. As the unbilled bench is put to work, incremental revenues from the currently unbilled staff can further subsidize an annual EBIT drag of up to US$150-200m without denting reported margins.

This may not be the last acquisition for INFY in near-term as mgmt has been commenting on their focus to acquire in the products and platform space. Most Brokerages are Neutral on the Stock and have Target Price ranging from rs 2,300 to Rs 2,700[Citi].